Banking and Insurance Company Policies Approaches

College of Banking and Financial Studies Undergraduate Studies Department BSc Accounting, Auditing and Finance Lecture 1: The Banking Industry – An Overview 1 2 An Introduction to Banking 3 What is banking? Basic Definition: A system of trading money which: provides a safe place to save excess cash, known as deposits. Supplies liquidity to the economy by loaning this money out to help businesses grow and to allow consumers to purchase consumer products, homes, cars etc. https://www.youtube.com/watch?v=kUoJ2XWEgPA 4 What are banks? Further Aspects An intermediary, which handles other people’s money both for their advantage and to its own profits. A financial institution that links the flow of funds from savers to the users. Plays an important role in the economy of any country as they hold the saving of the public. 5 Banking in the Sultanate of Oman  The British Bank of the Middle East, monopolised the market up to 1972  In 1972 : three banks . No of branches : 3  In 1973 the National Bank of Oman (NBO) was established as the first local bank in the country.  Central Bank of Oman Established in 1974 . Types of Banks in Oman 6  Local banks  Specialized banks  Islamic banks  Foreign banks 7 Types of Banks in Oman  By the end of 2017 the sector consisted of 16 conventional commercial banks, of which seven were locally incorporated and nine were branches of foreign institutions  There was a network of 470 (436 in 2017) branches, 1,109 (1,288 in 2017) ATMs, 254( 225 in 2017) cash deposit machines and 13 on-site banking facilities.  In addition the conventional banks had five branches and two representative offices abroad.  Of the seven locally incorporated conventional banks, six were listed in the Muscat Securities Market. All the conventional banks are privately owned, with the Government having minority stakes in a few.  Source CBO Annual Reports 2016, 2017 8 Types of Banks in Oman  There were two Government owned specialized banks, namely, the Oman Housing Bank and the Oman Development Bank, which provide soft financing to nationals to build or purchase residential property and to private sector investors to finance small projects, respectively.  The two specialized banks operated with a network of 23 branches.  At the end of 2016, there were also two full-fledged locally incorporated Islamic banks, namely, Bank Nizwa and Al Izz Islamic Bank.  The Islamic and the conventional banks’ Islamic Windows together operated with 70 ( 76 in 2017) branches  They also had 72 (79 in 2017) ATMs and 17( 41 in 2017) cash deposit machines in services.  Source CBO Annual Reports 2016, 2017 9 FUNCTIONS OF COMMERCIAL BANKS Core banking functions Other functions 10 Core banking functions Accepting deposits Granting loans and advances Payment services 11 Core Banking Functions  Granting Loans ✓ Underwriting – the process of lending or providing loan: ✓ Banks underwrite loans in two steps. ✓ Step 1: the bank analyses the borrower’s financial capacity, or the borrower’s ability and willingness to repay the loan or credit. ✓ Step 2: The bank pays out, or funds, the loan (money or cash) to the borrower.  Accepting Deposit Banks in the Economy 12 ✓ Financial intermediation – Banks channel savings from depositors to borrowers. ✓ Asset transformation – the process of creating loans from deposits. ✓ Money creation – Banks, through financial intermediation and asset transformation, engage in money creation. 13 How does a bank make money?  A bank can make money in a variety of ways. Most of a bank’s revenue comes from the interest they receive on the money they lend. Interest is, however, also a major cost for a bank, as savers receive interest on their savings.  Banks earn money by charging more interest on loans than that they pay on savings.  Interest income is used to cover the costs involved in keeping interest-rate risk under control, to cover losses on loans that are not repaid or not repaid in full, and to pay the bank’s overhead, such as wages.  Besides interest income, banks also make money from other transactions and services, such as providing financial advice and products to large corporations. 14 Core Banking Functions ✓ Payment Services ✓ Depositors can use their deposit accounts at banks to make and receive payments between depositors and between banks. ✓ Payments usually involve the transfer of funds between the parties both nationally and internationally. ✓ Various payment systems include cheques , payment orders, bill payment, and electronic payments in the form of wire services and other electronic settlement systems. 15 Other Banking Functions  Cash management : banks provide cash or treasury management services where bank agrees to handle cash collection and payments for a company and invest any temporary cash surplus  Investment and securities related activities :Many bank customers demand investment products, such as mutual funds, unit trusts, and annuities, that offer higher returns, with higher associated risks, than bank deposits.  Banks also offer other securities-related activities, including brokerage and investment banking services. 16 Other Banking Functions ✓ Letters of credit: When a bank provides a letter of credit, it guarantees a payment on behalf of its customer and receives a fee for providing this guarantee. ✓ Insurance services: Insurance services are a logical progression for banks since insurance products have financial intermediation and asset transformation features similar to traditional bank products. ✓ Trust services: many banks offer trust services that professionally manage a customer’s assets for a fee. ✓ Risk management services: Banks have developed sophisticated skills and complicated tools to manage these complex risks – such as interest rate, exchange rate, and price risks. 17 Different Bank Types Retail Banks Wholesale Banks Retail Banks 18 ✓ Retail banks’ primary customers are individuals, or “consumers.” ✓ Many retail banks also offer services to small and medium enterprises (SMEs). ✓ Some retail banks have small network of local branches that enable them to focus on retail consumers in one specific geographic area such as a city or a region of a country. ✓ There are also a number of very large retail banks that have extensive branch networks that cover entire countries or portions of countries. Wholesale Banks 19 ✓ Wholesale banks’ customers are primarily corporate and non-corporate businesses. ✓ Wholesale banks also offer advisory services tailored to the specific needs of large businesses. 20 Universal banks International, multinational, or global banks Investment or merchant banks Commercial banks Wholesale Banks Correspondent banks Types of Wholesale Banks 21 ✓ Commercial banks: They offer a wide range of highly specialized loans to large businesses, act as an intermediary in raising funds, and provide specialized financial services, such as payment and risk management services. ✓ Correspondent banks: These offer banking services to other banks, including loans and various investment alternatives. ✓ Investment or merchant banks: They offer professional advice to corporations and governments about raising funds in the capital markets, advice on buying or selling companies whole or in part; in the case of governments, they will advise on privatizing public assets. 22 Types of Wholesale Banks ✓ International, multinational, or global banks: Wholesale banks that finance international trade and often operate in several countries through representative offices or smaller branches. ✓ Universal banks: Banks that offer financial services, including insurance, along with the core banking functions. Central Banks 23 ✓ Are the principal monetary authority of a country or a group of countries and are crucial to the functioning of all banks, financial markets, and the economy. ✓Central Bank of Oman Established in 1974 Powers are conferred by the Banking Law of Oman ( 1974 and its amendment in 2000) First branch established in Salalah in 1978 Second branch : Sohar in 1988 24 ROLE AND FUNCTIONS OF CBO  Plays a dual role in the financial system of Oman  Exercises monetary control and regulates & supervises the banking sector.  Ensures safety and soundness of the banking on an ongoing basis  Main objective of regulation and supervision of Banks- is to protect the interest of depositors 25 REGULATORY FUNCTIONS OF CBOLICENSING  Banking business cannot be undertaken without a licence from CBO.  Branch expansion , closure and shifting of location has to be according to the branch authorization guidelines of CBO.  This applies to branches of foreign banks also. 26 Bank Deposit Insurance Scheme A sound, competitive banking system is important to a nation’s economic vitality. Deposit Insurance is a key element in maintaining confidence in the banking system and promoting financial stability. It is a system established to reimburse depositors either fully or partially their deposits with a member bank in the event of the member bank’s failure. 27 Bank Deposit Insurance Scheme  The objectives are to encourage public savings and to boost and enhance the confidence of the public in the financial soundness of the banking system in the Sultanate of Oman.  To provide comprehensive insurance coverage on specified deposits with banks operating in the Sultanate to encourage public savings.  To minimize the impact of traditional risks in operations of the banking sector. 28 How does the BDIS operate ?  Initial contributions of OMR 5 Million each from the Central Bank of Oman (CBO) and the member banks collectively provided the base capital for BDIS at the inception.  Premiums are collected on an ex-ante basis from member banks and CBO.  An annual premium of 0.05% of the total value of deposits at the end of each financial year (31/12) is collected from all member banks.  CBO contributes half of the total premiums paid by member banks each year in accordance with Regulations. Deposits Covered 29  Current compensation amount is a maximum of OMR 20,000/-.  Deposits of OMR 20,000/- and below will be compensated in full. Eligible Deposits : Savings Deposits  Current Accounts  Call Deposits  Time Deposits  Government Deposits  Trusts / Pension Bibliography 30 1. CBO Annual report 2016 2. Banking Law 2000 3. https://www.ing.com/About-us/Profile-Fast-facts/The-role-of-banks.htm 4. Bank Deposit Insurance Scheme Awareness accessed from http://www.cbo-oman.org/news/BDIS30June2014En.pdf College of Banking and Financial Studies Undergraduate Department-B.Sc. Banking & Finance BANKING AND INSURANCE COMPANIES ACCOUNTING LECTURE 2 – Bank’s book-keeping system Characteristics of a Bank’s accounting system  The book keeping system of a banking company is substantially different from that of a trading or manufacturing enterprise.  A bank maintains a large number of accounts of various types for its customers.  Customer accounts must be maintained up-to date  The general ledger trail balance should be extracted and agreed upon on daily basis. 11/5/2020 2 Major Book of Accounting in a Bank 1) Principal Sections a) Cash Book b) General Ledger c) Profit and Loss Ledger d) Subsidiary Ledger 2) Ledger Sections 3) Register Sections 11/5/2020 3 Principal Section- A. Cash Book The main activity of a bank is the transactions of money. Every transaction in cash is to be entered in a cash book. Bank maintains two types of cash books: 1) Receiving cashier’s Cash book and 2) Paying Cashier’s Cash book. 3) Main Cash Book 4) Cash balance book Receiving cashier records the following: a) Serial number b) Name of the depositor c) The Amount received When a clients deposits money, he pays it along with duly filled in pay-in-slip. The receiving cashier receives money and returns the counterfoil of the pay-in-slip to the client after signing and stamping it.  ` 11/5/2020 4 Cash Book  The paying cashier records the following:  a) serial number  b) name of the payee  c) token number  d) the amount 11/5/2020 5 Cash Book  How is money deposited in an account? When a clients deposits money, he pays it along with duly filled in pay-in-slip. The receiving cashier receives money and returns the counterfoil of the pay-in-slip to the client after signing and stamping it.  How can money be withdrawn form an account? When payment is made the payment cashier receives a token from the client given to him by another staff of the bank to whom the client gives the cheque or withdrawal slip to withdraw the amount from his account. 11/5/2020 6 B. General Ledger  It is a key ledger of the bank. It contains  Total current account  Total Savings account  Total Loans account  Total Bills Payable account  Total Expenses  Total Revenue account  These ledgers are kept under self-balancing system to draw trial balance. 11/5/2020 7 C. Subsidiary Ledger  A) Current Account Ledger  B) saving Bank Account Ledger  C) Fixed Deposit Account ledger  D) Recurring Deposit Account ledger  E) Loan Ledger  F) Investment Ledger  G) Bills Discounted and Purchased Ledger  H) Customers’ Acceptances, endorsements and Guarantee Ledger 11/5/2020 8 Register Section  The following registers are maintained by the banks:  (i) Bill for Collections Register;  (ii) Securities Register;  (iii) Document Register;  (iv) Standing Order Register;  (v) Cheques Dishonored Register;  (vi) Draft Issue Register;  (vii) Draft Payable Register;  (viii) D. D. (Demand Draft) Register;  (ix) Foreign Letter of Credit Registers;  (x) Safe Deposit Vault Register. 11/5/2020 9 Rules of Debit –Credit for a Bank  Real Account (Assets) Debit – Increase in the assets Credit – Decrease in the assets As per the general accounting rule when cash increases, it is debited in the cash account. While in the bank book the increase in the cash balance is credited to the customer’s account. In the same ways cash paid (decreased) is credited in a normal cash account while it is debited to the customer’s account in the bank book. 11/5/2020 10 Example 1:  A business received RO 100/- by sale of goods. Business deposited the same to its bank. Bank passes journal entry as:  Debit: Cash A/c . (money received)  Credit: Customer’s A/c (bank is liable to pay) Customer passes journal entry as:  Debit: Bank A/c (Bank Balance increased)  Credit: Cash A/c (cash is reducred) 11/5/2020 11 Example 2:  Bank Receives a direct debit of RO 1,000/- on behalf of its customer. Bank passes journal entry as:  Debit: Direct Debit (Third Party) A/c  Credit: Customer’s A/c (Liable to pay to customer) Customer passes journal entry as:  Debit: Bank A/c  Credit: Customer (Receivable) A/c Cr 11/5/2020 12 Example 3:  Bank Charged RO 10/- as bank charges for its services to the customer. Bank Passes journal entry as: (debiting customers A/c)  Debit: Customer’s A/c  Credit: Bank Charges (income) A/c Customer Passes journal entry as:  Debit: Bank Charges A/c  Credit: Bank a/c (asset reduced) 11/5/2020 13 Cash account in Business Cash Book: Business’ CASH BOOK L/F C – – D/A Cash Bank Date 9,000 01/08/ 6,000 05/08/ 25,000 11/08/ 13/08/ 15/08/ 40,000 – 11/5/2020 Particulars Bank Peter Jack & Co Drawings Furniture Balance c/d Total L/F C D/R 50 40 Cash 9,000 Bank 2,700 2,460 2,500 12,000 20,340 40,000 40,680 14 Bank Statement: Date Particulars Chequ Withdrawal e No [Debit] Deposit [Credit] Balance Initial 01/08/ By Cash (Deposit) 05/08/ To Cheque (Sam) AS01 10/08/ By Cheque (Collection) MG41 12/08/ To Cheque (Jax & Co) AS02 13/08/ To Cheque (Self) AS03 17/08/ To Cheque (Pine Wood Traders) AS04 18/08/ By Cheque (Collection) TR82 18/08/ To Collection Charges 11/5/2020 15 Example  E.g.1 Mr. A deposited OMR 5000 in the bank account. Dr. Bank account (Debit side of the cash book- Bank column) Cr. Cash account (Credit side of the cash book – cash column)  E.g.2 Mr A purchased inventory for OMR 600. Received cash discount of OMR 20.  Dr. Inventory (not recorded in the cash book)  Cr. Cash account (Credit side of the cash book- cash column)  Cr. Discount received (Credit side of the cash book-DR column) 11/5/2020 16 Bibliography  Banking Law 2000  www.icai.org  https://www.ing.com/About-us/Profile-Fast- facts/The-role-of-banks.htm 11/5/2020 17 College of Banking and Financial Studies Undergraduate Department-B.Sc. Banking & Finance Semester 3 BANKING AND INSURANCE COMPANIES ACCOUNTING LECTURE 3 – Banks’ Financial Statement Components and Analysis Financial Statements of Bank 2  Income Statement (Statement of total comprehensive income)  Statement of Financial Position  Statement of change in equity  Cash flow statement  Notes to accounts 11/5/2020 3 Components of Income Statement:  Interest Income  Interest Expense  Other Operating Income  Impairments of Loans and other financial instrument  Operating Expenses  Other Comprehensive Income/Expenses 11/5/2020 4 Components of Income Statement:  Interest income – Loans, advances, investments, amount due from other banks  Interest Expense – FD, Savings and current account, borrowings, interbank deposits  Income from Islamic Banking – prohibits riba or usury (interest or fees on a loan). Pools customer’s money as agreed with customer known as profit or losses as the case may be.  Other operating income – income from loan servicing, fees, charges, underwriting, advisory, market research, dividend, foreign exchange gain 11/5/2020 5 Components of Income Statement:  Impairment of Loans – in case of non collectability of any loans or advances, probable loss value should be provided as an impairment loss and provision should be created  Interest on doubtful debt – in case of doubtful loan/advance the interest due should be credited to suspense account. On receipt it gets transferred to interest income account and unrealized part goes to bad debt account. 11/5/2020 6 Components of Income Statement:  Other operating expenses – Salary, wages, rent, taxes, depreciation and all the other general administration, office and sales and marketing expenses are included in the operating expenses  Other comprehensive income – Fair value reserve (Revaluation reserve, reversing revaluation reserve), Earning per share 11/5/2020 7 Components of Statement of Financial Position  Assets  Liabilities  Equity 11/5/2020 8 Components of Statement of Financial Position  Assets – Cash, Investment securities, Loans receivables  Liabilities – Deposits, Balances of current and savings account  Equity – Share capital, Legal reserve, General loan loss reserve, Subordinated debt reserve, Contingent liability  The contingent liability includes financial guarantee, letter of credit, loan commitments, capital commitments, lease commitments 11/5/2020 9 Components of Statement of Financial Position  Assets  Cash and Cash balance with CBO  Due from other commercial banks  Loans and Advances and Financing, net  Investment securities  Property and Equipment  Other Assets 11/5/2020 10 Components of Statement of Financial Position  Liabilities  Due to banks  Customer deposits  Borrowed funds  Taxation  Other liabilities  Subordinated liabilities 11/5/2020 11 Components of Statement of Financial Position  Equity  Share …